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Builders like Richard Oliver have been doing it tough over the past year and, while there are early signs one of their key problems is resolving, other major threats are emerging that may see more construction firms go under.
Key points:
- The price of house building materials rose more than 14 per cent over the year to December
- Rising materials costs are causing many builders to lose money on fixed-price contracts
- Industry figures show new home sales in December slumped 42 per cent compared to a year earlier
The single biggest challenge for builders like Mr Oliver over the past couple of years has been sourcing enough materials at affordable prices, as supply chain woes have hit everything from timber to bricks.
The latest price spikes the Darwin-based home builder has noticed include steel for building frames and aluminium finishings.
"In some instances, we've seen 50 per cent [increases] across the steel market," he told ABC News.
"Steel [is used] from the preliminary stages of reinforcements in the slab or footings right through the structural steel-wall framing, roof construction, cladding, windows, aluminium windows.
"The steel could be 50 or 60 per cent … of the actual construction anyway here in the Northern Territory."
Building materials costs still surging, just a bit less
There may be some relief in store amid signs that building materials prices may be close to peaking.
The Produce Price Indexes, released by the Australian Bureau of Statistics (ABS) on Friday, showed cost increases for building materials used in houses slowed again in the December quarter.
Notably, Mr Oliver's steel pricing issues may soon be behind him, with steel products' prices dropping 2.1 per cent over the final three months of last year due to reduced steel costs, improved supply conditions and lower shipping costs, according to the ABS.
However, the cost of concrete, cement and sand jumped 5 per cent, while there was an even bigger surge in the cost of cupboards and built-in furniture as plywood and glass prices climbed.
The 2.2 per cent overall increase still left the annual price rise for residential building materials at more than 14 per cent.
Mr Oliver is not confident that big price hikes are over.
"I think there are more [price hikes] on the horizon, making things very difficult," he continued.
"It would help the market and help everyone if the costs started to decrease or plateau."
That is because – like many home builders – Mr Oliver needs to give fixed price quotes to clients who are building a house.
In a rapidly inflationary environment, it has been increasingly difficult for him to stick to the quoted budget and still make money.
"It's a risk that everybody [in the building industry] is taking," he says.
"It's been a difficult task and challenging to ensure profit is maintained throughout all these increases."
Inflation been so extreme that he has given up putting price estimates on materials in brochures for clients.
"We stopped doing that about two years ago. It's just a waste of time if we update our catalogues on a monthly or quarterly basis … they could be irrelevant within 30 days."
Customers cancel contracts as interest rates rise
But now another existential threat is confronting home builders.
The interest rate rises intended to stymie the inflation that has been crippling many builders are doing so by killing off the demand for their services.
The latest figures from the Housing Industry Association (HIA) show sales of new homes dropped 4.6 per cent in December and were 42 per cent lower than a year earlier.
"This slowing in sales will flow though to a slowdown in building activity in the second half of 2023," HIA chief economist Tim Reardon warned.
Mr Reardon said the increase in interest rates was already seeing many existing contracts cancelled.
"The rise in the cash rate has also seen many recent buyers of new homes unable to finance their new project," he said.
"This resulted in one in five recent new home buyers having to cancel their new home building contract as their access to finance was reduced by the rise in the cash rate.
"With one in five customers cancelling their new home building project each month, the pipeline of building work will be eroded quickly."
Mr Oliver said the combination of higher rates, reduced borrowing power and surging construction costs was driving cancellations.
"This is something we have experienced," he said.
"Even in a few short months between providing initial price guidance and working into their budget, the eventual actual cost by the time the contract is ready to sign can and has risen by 10 to 15 per cent, resulting in the contract being cancelled or postponed.
"It's a frustrating process as there are months and months of work going into preparing a custom home contract."
As well as being a small business owner, Mr Oliver also just built his own property in Darwin and is on a variable mortgage.
"It's nerve racking, obviously, because I'm a mortgage holder, but I also build houses for a living," he said.
"So it's almost like double the risk.
"It's a possibility that I could lose out or break even on jobs that might have an impact on my personal situation. So it's a nerve-wracking market."
Even as the latest inflation figures make at least one more increase in the official cash rate target all but certain when the Reserve Bank meets on February 7, Mr Reardon says the construction industry is crying out for lower rates.
"A cut to the cash rate will be necessary in 2023 to avoid an unnecessarily sharp downturn in building activity," he argued.
"The RBA will not restore the economy to stable growth by putting the housing industry through boom-and-bust cycles."